Bull Became Bear: What’s next??

Once a sanguine country it seems INDIA is moving to a zone of uncertainty.  The uncertainty is about the economic condition, Inflation, profits of companies driven by corruption, attempts of global recovery and foreign investor having bad experience at INDIA. A recent survey that concluded India to be most over regulated country and poor infrastructure apart from 7 cities is INDAI is finding it difficult to be an economic aphrodisiac anymore.  Despite having an increased per capita income that touched $1000 marks (Rs 46,492) India has seen its propensity of consumption decrease to 0.6 resulting in many MNC wondering what they should do to make INDIA consume more.

The mood is evident from the recent slump in INDIAN Sensex. Sensex fell by 10.6 % in month of January, 2011 and slipped to its lowest since Oct 2008 to a figure of 18327. Weak global market and anti-government protest in Egypt is being attributed to be major factors along with common concerns about Inflation end below expected performance of key companies like Infosys. One of the major reasons that can be added to this is dip in FDI by 26 per cent during January-November 2010 to about USD 19 billion from USD 25.5 billion in the year-ago period.

The market that was rising like a star has slumped like anything. One may wonder why this sudden mood of change. Why FDI is dropping down and why all of a sudden there are doubts about us. I read economic times regularly and found various notions suggesting two entirely different view points on INDIA.  When BofA/ Merrill lynch suggested that sensex will remain flat; Goldman Sachs take is that Even as some investors are turning their backs on, and high inflation emerging market will manage to attract investors. In totality we are confused what’s next for us.

I read once that many investors found it difficult to cope up with Indian infrastructure. As a result few investors are still keeping their finger crossed. Recent CITI bank fraud, Satyam embezzlement has lead one to wonder will corruption engulf INDIAN private sector as well. No wonder Sensex is diving down.

I am wondering whats next. I will try to make a prediction and comeback.

P.S : Dubai market fell 6% cause of anti-government protest in Egypt and market across the world is reflecting the sentiment.

SLR (Statutory Liquidity Ratio) : A summery

SLR (Statutory Liquidity Ratio):

It refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India.

The main objectives for maintaining the Statutory Liquidity Ratio are the following:

1.       Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion.

2. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.
3. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds.

However the one theme behind SLR is to force banks in investing less returning securities of government.  In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes and in an emerging economy interest rate change is a common activity. 

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.

Determination

It is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on their anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities.

Thus SLR Rate = Total Demand/Time Liabilities x 100%

The maximum limit of SLR is 40% and minimum limit of SLR is 24%.  The RBI as per need can ask banks to maintain SLR between these two. At pres the SLR rate of INDIA is 24%.

SLR and G-Sec(Government security)

While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.

These include:

1.     Interest rate increases.

2.     Changes in the prudential regulation of banks’ investments in G-Sec.

Most G-Sec held by banks is long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.

Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporate and resolve liquidity crisis; providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporate.

Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.

SLR and News

In November,2008 when RBI reduced the SLR rate by 1% to 24% then economic times reported “A cut in SLR means that the home, car and commercial loan rates will go down. It also means that banks will now have the option of selling Rs 40,000 crore of government securities that until now formed part of their statutory investments. It was increased to 25% in 2009 and then was again reduced to 24%.

Corruption as a driving Factor of Economy Vol. 2

In last post i talked about how we feel about corruption. However i ended my post with the benefits from whole corruption industry. Now let us look at it more figuratively. Before that i will like to introduce a term Marginal propensity to consume. And this consumption will be more for the corrupt people. But again on being safer side i will stick with INDIA’s average propensity to consume.

In economic, the marginal propensity to consume (MPC) is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

Mathematically, the marginal propensity to consume (MPC) function is expressed as the derivative of the consumption (C) function with respect to disposable income (Y).MPC= dC/dY, where ΔC is the change in consumption, and ΔY is the change in disposable income that produced the consumption

This simply means if a person earns Rs 100 extra he spends something around say Rs 50 extra. This Rs 50 extra is someone else extra earning who spends 25 extra and so on. If you see this Rs 100 grows to something more than it is.

In total it increases over all earning and consumption.  Increased consumption means more production and thus more GDP. Now let us go by simple funda of G.P. Also, expense by someone always brings earning to other. So on a whole and extra income of 100 will add on a lot like the following. We know that marginal propensity to consume in India is 0.6 (Down from 0.75).

So for every Rs 100 as a bribe, net increase in national income is:

100 + 100*0.6 +100*0.6*0.6 +100*0.6*0.6 . . . . . .  Infinity = 100/ (1-0.6) = 250

Based on this a total corruption industry generates an income of 0.25/ (1-0.6) =.625 trillion (half of current INDIAN GDP). I understand this figure lacks so many things. Like, Most of black money is saved outside India.  Second Our GDP calculation doesn’t take this black money into account while calculation GDP. For example when a retailer pays to distributor who in turn pays to industry, there are many transactions which are not shown as bill to avoid taxes. These amounts are not part of GDP but a part of our production process. So they don’t officially figures in Income calculation but it contributes to it. Just imagine what would have happened to Indian GDP without corruption.

P.S: This calculation is a wildest simplification with no economic meaning. It is simply an eye-opener. That even though i can’t reach a definite figure, and the figure

Corruption as a driving Factor of Economy Vol. 1

Bloody Mary is a suitable synonym of corruption that has been haunting India since inception. British brought slavery mindset, they brought democracy, they brought administration, they brought English but worst of them all they rooted corruption when Bharat became India.  However one may argue was it not corruption when Zamindar flourished over peasants?  Since then corruption has been an inflammatory snake which has denied vehemently to be closed in a box. In fact dancing on tunes of the administrator this snake is making country dance on it tunes.

Lot has been said about the negatives of corruption but what i am going to focus on is how corruption has made India grow. No doubt i hate the sinister corruption as much as you do. No doubt corruption is a nemesis without which country will feel safer and better. No doubt corruption is a wicked sick that makes heroes a part of folklore. And no doubt corruption has rotten the system like anything. But a truth remains; we can’t live without the blood of Indian governance that uses viral corruption as a part and parcel of Organism India. Even we can’t dissemble ourselves from oncogenic corruption.  Let us face it, the evil corruption is as a life of ours as is our administration.

Being a sanguine patriot of this mighty nation whose core lies in basic nuisance of political drama i want to view utter absurdity of mind waggling sickness into new light. In the coming part i will try to evolve the corruption to something at least remotely well.

The first opportunity that a corruption gives is the “right of equal opportunity “. Don’t you that a policeman who keeps his life in line for paltry Rs 5000 has a basic right to educate his children and feed his family. Now corruption gives an opportunity for him to live. The desperation is so huge that you can be safe of many minor doings for a paltry Rs 20. But the beautiful part is that it leads to a wider distribution of money. When a thief steals the money held in hand of one people is distributed to 4 to 5 people. 1. Owner who is left with certain cash 2. Who retains certain cash 3.  Policemen. In total 4 to 5 families are benefitted. In economic terms it means more money in market, leading to more consumption and hence more production which in turn increases country GDP. So for a country like India where corruption is a 250,000 crores(0.25 trillion) industry one can safely guess the amount it has been contributing in GDP of india standing at 1.367 trillion. Even if propensity of consume in INDIA is low the contribution is very high.

No wonder 88^th place in corruption INDIA will be fastest growing economy soon..

More to come.